This article studies "public enterprises" and projects and how they are initiated, planned, coordinated, budgeted, implemented and maintained. Audit, including the audit of projects, in the area of infrastructure, should be consistent with management conceptions and to public administration policy trends rather than opposed to them. Part of the article will be devoted to a review of the substantive changes that have occurred in recent decades in the structure, tasks and organisation of the public sector and their influence on the area of public work projects and on state audit in Israel. The article will also deal with the processes of planning, co-ordination and long-term budgeting at the system level and with implementation at the individual project level, in the context of state audit. Two major areas of public works are road construction and water supply.
2.1. The British Mandatory Government which ruled Israel until 1948 established the Departme Ont of Public Works (DPW) as the main tool for the construction of inter-urban roads. With the establishment of the State of Israel the DPW was attached to the Ministry of Labour because of its usefulness in creating employment. In 1979, the DPW was transferred to the Ministry of Construction and Housing.
The DPW itself underwent substantial changes as it switched from carrying out a significant portion of road building and maintenance by itself to emphasising the planning and supervising of projects. The actual work was done by sub-contractors on contract with the department, on the basis of competitive bids. At present, the Department of Public Works is still a semi-autonomous government unit, as part of a government ministry with limited budgetary and organisational independence. However, discussions are being held on transforming it to a statutory authority.
2.2. In 1970, "Netivei Ayalon Inc." was established as a government corporation owned jointly by the state and the central local metropolis - the Municipality of Tel Aviv - Yaffo. The corporation's primary task was to deal with the main transportation project in Tel Aviv. Since then it has assumed a greater role in transportation projects throughout the country, including the construction of bridges and tunnels. Thus the company is becoming an alternative and competitor to the Department of Public Works. Netivei Ayalon Inc. does not carry out its own projects, but sub-contracts through competitive tendering.
23. In 1993, the task of the DPW was once again reduced when the government set up another state corporation, Trans-Israel Road Inc., to plan and construct the country's central road-building project. This long-term project involves the paving of a road running the whole length of the country. It will form a central road artery and also influence local transportation in the areas through which it passes. Here too implementation will be by way of sub-contractors. The possibility is being considered of involving the private sector in its financing by turning it into a toll road.
3.1. The construction of waterworks at the edge of Israel's desert, for agricultural and community needs, was an important factor in the development and strengthening of the economy. Planning and construction of waterworks, including their operation and maintenance, has been monopolised by a government corporation, Mekorot Water Resources Inc.. The corporation operated on a cost-plus basis, which does not contribute to savings and efficiency. Serious financial allegations against the company and the manner in which projects were undertaken with its own and its subsidiaries' employees, have recently led to the signing of a cost agreement. This agreement does not affect the monopoly but purports to streamline it The corporation has promised to provide services on the basis of a progressively declining tariff and farm out an increasing portion of the work by competitive tender.
3.2. The State Comptroller has recommended that the Water Commission take steps to separate the planning, execution and oversight of water projects and increase the number of contractors in order to promote competition. Such a move will reduce the dependence of the Water Commission on Mekorot Water Resources Inc., increase the efficiency of developing the waterworks and reduce construction costs.
4.1. In Israel, the planning and implementation of public works and projects is subject to various laws in the interests of proper planning and efficient construction. At the same time, the land-use rights of individual citisen and the general public are protected, with due regard to the environment and the existing infrastructure. One of the most important laws in this connection is the Planning and Building Law of 1965 for the settlement of land-rights issues and conflicts of interest between planners, builders and other parties.
4.2. Another important law which affects public works and projects is the Competitive Bidding Law of 1993, which replaced the previous system of norms. This law requires government ministries and corporations to arrange for competition among suppliers and to allocate work only by public bidding. In special cases work may be allocated by closed tender or by negotiation and non-public competition. Public works and projects generally require public tenders because for the most part, they deal with physical objects which can be measured and quantified. In contrast, the planning and supervision of public works and projects can be arranged through negotiation which takes place only after a number of bids have been considered from various contractors to ensure fairness among potential bidders and maximise benefits for the public sector.
In Israel, there are three main types of government organisations for public works and projects: government ministries, statutory bodies and government corporations.
Government Ministries enable the relevant aspects of public works and projects policy making, priority setting, budgeting procedures and supervisory practices to be directly controlled by the government. Although this type of direct involvement by the government in the implementation of public works and projects has been steadily decreasing, semi-independent government units still remain in the ministries, such as the Department of Public Works.
There is a growing tendency to transform government units into statutory bodies. This stems from lack of flexibility in the government service as regards execution of public works and projects. Government ministries are bound by rules and regulations, conformity with which is audited by several external bodies (such as the audit unit of the Ministry of Finance). Such supervision leads to a less flexible structure, especially when complex technological, legal and organisational issues are involved.
This lack of flexibility is also found in the area of wages. Salaries in government ministries are generally lower than in statutory bodies or government corporations. The salary structure is more rigid since any raises in pay for one group of workers leads to demands from other groups for similar gains, thus increasing the cost to the government. In contrast, government corporations and statutory bodies, may give specific pay raises without undermining the general pay structure of the public sector, subject to limits imposed by the Ministry of Finance.
The organisational flexibility of statutory bodies in Israel is enhanced by their independent sources of income. For example, the state granted to the Port and Railway Authority and the Airports Authority the right to charge fees for their services. These fees, along with the right to rent storage space and stores within the area controlled by those authorities, generate revenue independent of the state budget and provide surpluses for future needs.
Government corporations are established under the Government Corporations Law, but operate according to the laws governing corporations in general. Government corporations function largely as independent businesses with a minimum of government intervention and control. Although having the greatest flexibility of the three main types of government organisation for public works and projects in Israel, government corporations remain limited in operations as a result of government participation in their management.
6.1. The degree of independence from the government budget for public works and projects has several operational implications, e.g. in long range budgeting and planning. Although government ministries operate through annual budgets, contracts can be signed stipulating payments in following years. However, such arrangements are limited in scope, clarity and authority to accommodate long-term obligations. As a result, government ministries are restricted in their ability to make plans for and commitments to long-term projects. Even where ministries engage in long-term planning, such planning is aimed at establishing annual operational priorities and does reflect Finance Ministry-approved long-term plans which are binding on the state budget and which allow the organisation to undertake long-term expenditures.
6.2. Budgetary frameworks for government ministries are inflexible even where budget changes are needed. Substantive budget changes - for items, projects, areas or even a change in budget authority - require a whole system of requests for changes to be set in motion within the ministry, often going up to the level of the Appropriations Committee of the Knesset (Parliament). In contrast, statutory bodies and government corporations have more flexibility in making budget changes, lines of communications are much shorter and are generally all within the organisation itself and do not require co-ordination with or permission from outside bodies.
6.3. The various forms of organisation also influence the measurement of costs and outputs for the whole organisation and individual projects. Government ministries still operate on a cash basis only, not on an accrual basis, with emphasis on inputs and less on outputs. In statutory bodies and government corporations, accounting on an accrual basis is better developed. Costs and outputs are measured both for the whole organisation and for individual projects.
The successful completion and operation of public works and projects are characterised by major co-ordination of the resources involved. In order to implement a project at either a public or private site, the planner and contractor involved must obtain agreement, not only from the land owner but also from the local government in charge of the site and from various bodies concerned with infrastructure, such as those dealing with communications, road transportation, railways, electricity, water, sewerage and drainage. Activities must also be co-ordinated with those in charge of associated developmental aspects, such as environmental quality and archaeological significance.
Planning co-ordination is necessary not only to remove obstacles and reduce conflict but is often important in order to complement other infrastructures. For example, the network of roads has to be co-ordinated with the rail network, so that the terminals of one are integrated with the terminals of the other.
8.1. The traditional task of state audit of the legal framework of public works and projects is the examination of compliance by planners and builders with the relevant laws. In particular, state audit determines whether the government bodies responsible for various aspects of these public undertakings were aware of the critical paths involved in planning and building. Did they plan their moves ahead of time, from the standpoint of the law, in order that legal constraints should not delay progress in planning and implementing the project? Were legal aspects and legal advice integrated into the planning framework of the project? Was there awareness of possible conflicts and were alternative plans examined in order to reduce anticipated legal friction? Legal considerations should be a significant factor in choosing the preferred alternative in every project decision.
8.2. In the audit of public works and projects, additional aspects of efficiency arise in the context of the legal system. Where the legal system lags behind necessary changes in national needs and thus blocks the efficient progress of a particular project, the task of state audit is to point to the need to change the law, provided that there is sufficient accumulated evidence. A recommendation to change the law is likely to be among the most important contributions of state audit. However, the State Comptroller exercises due caution in recommending legislative amendment in the areas of infrastructure planning and building and makes such recommendations only where they are proven to be both necessary and suitable.
8.3. Another example of the integration of the audit of legality with the audit of efficiency occurs in allocating contracts for public works and projects. The Competitive Bidding Law generally requires that work be allocated to contractors on the basis of competitive bids, although it is common practice and convenient to give the work to the lowest bidder. However, the cheapest bid may prove to be the most expensive - due to incapability, unreliability or poor quality of work. Here state audit not only examines whether the bidding process was competitive and free of nepotism but also whether appropriate quality criteria were laid down. Accordingly, the audit of legality is consonant with the audit of efficiency and recognises contemporary managerial approaches, such as TQM (Total Quality Management). Moreover, international quality standards - I.S.0.9000 - emphasise the development of a network of high-quality suppliers who, in the long run, are likely to prove the most economical suppliers.
In the examination of consistency and regularity in various areas of the public sector, state audit often reports on deficiencies in internal control and lack of adequate supervision. Such reporting highlights the necessity for appropriate rules, regulations, directives and laws which restrict and limit the actions and decisions of public servants. Such an audit is liable to clash with an audit of efficiency, economy and effectiveness which recognises the importance of shortening processes, reducing bureaucracy and increasing flexibility.
From this point of view, the latter type of audit is more suitable for examining public works and projects where the output can be measured in terms of physical results. Such a business activity can be carried out by the private sector, statutory bodies or government corporations. It does not necessarily have to be carried out by government ministries. Given the weaknesses of the bureaucratic system, state audit must consider whether to recommend the need for such satellite entities. Accordingly, the State Comptroller's Office has, in the audit of the Department of Public Works, recommended increasing that department's flexibility by changing its legal status from an autonomous unit within a government ministry to a separate statutory body.
State audit attempts to promote budgetary, economic and accounting tools which will permit long-term planning and resource allocation while providing for suitable reporting, including reports of outputs, based on the principles of accrual accounting. This can also apply to government ministries. The demand for long-term budget and accrual accounting, including reports on output, not only contributes to the proper implementation of public works and projects but also to the planning and implementation of performance budgets in government ministries.
11.1. Here too, state audit stresses efficiency, economy and effectiveness. State audit must examine whether all reasonable co-ordination has been carried out in advance; whether all the inter-organisational and legal conflicts were examined and whether all the site's physical obstacles were located. Lack of proper planning can result in the inefficient allocation of resources on two different levels.
11.2. The first level is pre-planning of work on-site and preparation for it. The State Comptroller's Office sampled 48 road-paving projects carried out in 1990 and 1993, with combined budgets representing about 20% of the total budget of the Department of Public Works. Examination of the work schedules involved in the projects and their comparison with the planned schedules showed an average overrun of 75%. The State Comptroller's Office found that the major cause was lack of detailed planning, lack of co-ordination with relevant factors and failure to foresee many of the obstacles which could have been located by optimal planning.
11.3. The cost to the economy is even higher than the budgetary costs of the projects. A project which has been started and not completed has additional costs which must be taken into account: delays in traffic flow; fear of increased accidents at those sites and influence on completed projects intended for integration to assist traffic flow.
11.4. The second level is the inter-organisationai co-ordination of plans. The State Comptroller's Office found lack of co-ordination and joint planning in several instances, including the following three examples:
11.4.1. The increase in the rate of public sector home-building to absorb the wave of immigration of Jews from the former Soviet Union was not matched by a corresponding increase in essential infrastructure (such as sewerage facilities and road systems), resulting in many completed houses being left unoccupied.
11.4.2. Rationalisation of transport facilities has been impeded by the number of different public bodies and budgetary constraints involved, resulting in bus terminals not being planned and built in conjunction with rail terminals.
11.4.3. The lack ofco-ordination in scheduling the various stages of highway construction has caused major traffic jams and inefficient resource utilisation on the inter-urban highway at the entrance to the capital, Jerusalem. In view of state audit criticisms of the lack of inter-organisational co-ordination and resulting conflicts between the various public bodies, the Israel Cabinet recently decided to establish a National Council for public works. The Council, which is a government body administered by the Ministry of Transportation, will provide a forum for the infrastructure bodies involved to improve the planning and co-ordination of public works and projects.
12.1. The successful implementation of audit assignments for public works and projects requires the analysis of organisational systems and examination of their efficiency, economy and effectiveness. This type of auditing also requires skilled personnel with a multi-disciplinary approach through a combination of engineering, economic, accounting, legal and organisational knowledge. For that reason, teams of several members are formed where necessary to provide a multi-disciplinary view, with the main focus on engineering and economics.
12.2. Public sector audit personnel in Israel are university-educated with at least a bachelor's degree. In addition, the State Comptroller's Office offers further in-house training in accordance with vocational needs and also sends employees on external courses, such as project management.
12.3. An important issue facing state audit in Israel in the area of public works is its relationship to the structure and organisation of the State Comptroller's Office. Government units which have a common legal framework, such as in local government, are likely to be audited by a single unit within the State Comptroller's Office, while the audit of government corporations tends to be the responsibility of a separate unit. Further, the audit of government ministries is allocated to four separate divisions, partly on the basis of function and partly on geographical location.
12.4. As a result of the above organisation of public sector audit resources, no single unit in the Israel State Comptroller's Office specialises in or is responsible for, the audit of physical planning, the construction of infrastructure or the implementation of public works projects. In practice these areas may be audited by any unit regardless of the specialised skills required. As long as state audit emphasises the importance of individual projects, the situation was manageable but, as systems audit and inter-ministerial co-operation have increased, the divisions within the State Comptroller's Office and the lack of specialisation have complicated co-operation and coordination within the office itself.
12.5. For example, the audit of an infrastructure project is likely to involve the Ministry of Transportation, which is the responsibility of one particular unit; the Department of Public Works, which is the responsibility of a different unit and the relevant local government, which is audited by a third unit. Furthermore, it is often necessary to conduct supplementary audit examinations of large government corporations, including Mekorot Water Resources and Israel Electric Corporation, which are audited by a fourth unit.
12.6. In this context, the allocation of auditing resources has special problems. Ideally, the efficient audit of public works and projects requires engineering knowledge organised in a single specialised unit capable of examining the particular problems of that type of organisation. The State Comptroller's Office employs several engineers and architects dispersed among the various units mentioned above, rather than located in a specialised technical unit. Although it is theoretically possible to move the engineers and other professional staff from unit to unit as needed, such mobility is difficult in practice.
12.7. The problem of allocating specialised technical resources in the audit of public works and projects has been partly solved by the State Comptroller's Office employing a full-time engineering consultant. However, the relevant audit is likely to involve specialised aspects of engineering - bridge building, water supply, drainage and sewerage facilities, road paving, regional and urban planning and other development. There is thus a need for external professional advice in specific fields. However, there is a shortage of consultants because those eligible are often engaged by the organisations responsible for the public works and projects which the State Comptroller's Office wishes to audit. This potential conflict of interests narrows the number and range of consultants available to the State Comptroller's Office.
The State Comptroller's Office has a mandate to review and investigate all stages of a project:
14.1. In view of the limited resources available, public projects are usually graded in order of priority. Such projects are supervised by the Ministry of Finance, which determines priorities in conjunction with the relevant government corporations, statutory authorities and units of other government ministries. However, the State Comptroller's Office has examined the criteria used in the allocation of priorities and has decided that the considerations taken into account are often too narrow. For example, the decision to pave a road is based on physical conditions such as a road's volume of traffic versus its vehicle-bearing capacity, the rate of accidents and the cost to the economy caused by the slow movement of traffic.
However, ecological damage is not always taken into account. Those and other indirect costs, such as health costs caused by the emission of noxious gases, have attracted increasing attention in Israel, as elsewhere. Accordingly, the State Comptroller's Office is considering recommending that such environmental costs be given due weight in the choice of alternatives and priorities, hi any event, the State Comptroller's Office has requested that the criteria to be considered should be defined in writing, but this has not yet been done.
14.2. When choosing an alternative it must be established that the complementary projects advance the general project. It is also necessary to examine whether or not there are better alternatives. The State Comptroller's Office examined the Port and Railway Authority and found that the economics of integrating railways and roads had not been examined prior to the approval of the railway development budget. The Ministry of Transportation, which is responsible for the Port and Railway Authority and generally for the development of the railways and urban road system, did not co-ordinate its activities with the Ministry of Construction and Housing. The latter ministry controls the Public Works Department responsible for planning and building the inter-urban road network.
15.1. Proper organisation of work requires that the project developer request the planners to supply various alternatives. The one chosen is forwarded for detailed planning and provides the basis for the public tender. After selecting the contractor with the winning bid, the project developer appoints teams to provide both overall and immediate supervision on his behalf.
15.2. The State Comptroller's Office examined orders for planning and supervision of water projects and discovered that these arrangements and the concomitant division of labour does not always exist. Israel has a professional body, the Water Authority, which plans and develops waterworks and allocates water supplies for all requirements of the economy. However, that body lacks the necessary budget and personnel. Accordingly, the planning of projects and choosing of alternatives, in addition to detailed planning, is often done by other government bodies such as the Mekorot Water Resources Inc., which has a vested interest in carrying out the actual work. A situation often arises where there is no separation between the planning body, the supervisory body and the implementing body. In order to avoid this potential conflict of interests, the State Comptroller's Office has recommended the strengthening of the professional forces within the Water Authority.
The quality of financial reporting in Israel is a function of the legal and organisational structure of the implementing body. Execution of the project by government corporations or statutory bodies is usually accompanied by accrual-based financial reporting relating to all financial costs of the organisation in addition to reporting by project and field of activity. In contrast, the financial reporting of government units is confined to cash flows. However, in reporting for public works and projects it is important to compare the rate of physical progress with the rate of cash expenditure. It is thus possible to ascertain whether costs are exceeding estimates and whether delays in construction schedules are likely. As yet, neither government corporations nor government offices satisfactorily report output The State Comptroller's Office in its auditing of these areas recommends and encourages the development of accrual accounting techniques and at the same time, reporting on outputs at both project and organisational levels.
17.1. When examining the alternatives to paving a road it is necessary to examine the standard of paving: a high standard means high initial cost versus economy in maintenance costs over the life of the road. The State Comptroller's Office discovered that the Department of Public Works did not calculate the economic value of road quality.
17.2. The State Comptroller's Office is also examining the quality of planning and building roads and bridges. In this regard, it intends to examine whether the DPW has made quality standards obligatory for all stages of projects, so that principles of total quality management are applied and international quality standard I.S.O. 9000 is adopted.
The State Comptroller's Office has recently endeavoured, with the aid of external consultants, to compare various planning and construction solutions to bridge engineering problems. The intention is not to set up alternative solutions but to examine the decision-making process, including the examination of alternatives and determine whether the preferred solution is reasonable from the viewpoint of efficiency, economy and effectiveness.